Chinese economic growth got off to a good start this year having managed to sustain last year’s strong momentum over the turn of the year. This is indicated not only by the official economic growth data that were published this morning. Many growth and survey indicators from almost all sectors of the economy also indicate a robust performance in the first quarter of the year. In the past few weeks the world-wide risks to growth have, however, increased and the outlook, especially for China’s export economy, has deteriorated. We have lowered our forecast for this year.
At 6.8 per cent year-on-year gross domestic product (GDP) sustained the pace of growth seen in the final quarter of 2017. It has now been at this level for what is already the third consecutive time. China’s officially reported growth rate is thus once again extremely inflexible – a trend that has become increasingly apparent in the last few years and which certainly deepens the scepticism about Beijing’s growth figures. But for the past quarter several other economic indicators that are less subject to political “straightening” also point to a slight acceleration in the growth trend. For example, the annual growth rate of industrial output accelerated again in the first quarter to 6.8 per cent. But towards the end of the year it was still being curbed by strict environmental protection measures. Investment activities were also somewhat stronger quarter-on-quarter. Especially construction investments increased at the beginning of the year. For the first time in three years they chalked up double-digit growth again. Also positive is the fact that propensity to invest of companies in the private sector increased significantly. But growth stimulus from state investing activities continued to abate.
China’s foreign trade also recovered significantly at the beginning of the year thanks to good global economic growth. Exports chalked up the highest quarterly growth in five years. But they were trumped, especially in real terms, by even stronger demand for imports so that foreign trade again failed to make a positive contribution to growth. It would undoubtedly be too early to attribute this to the smouldering trade dispute with the USA. Nevertheless, the outlook for China’s exports, which we expected would lend the economy as a whole a substantial growth stimulus this year, has deteriorated notably. The risk that the trade dispute will escalate further and that penal tariffs are really imposed on large part of the goods exchanged between the two countries is certainly not small even though we still assume that the two trade heavyweights will leave it at sabre rattling and that ultimately a negotiated solution will be found. But the uncertainty about this is also a potential brake on growth – for the entire world economy. This is compounded by the increased geopolitical risks caused by the US president’s unpredictable foreign policy – at the latest since the air strike in Syria last week-end.
A weakening of the global growth momentum, which we assume will be the case in the next few months, will have a braking effect on China’s export economy and will dampen economic growth somewhat more than we had previously assumed. For this reason, we have lowered our GDP forecast for this year from 6.7 per cent to 6.5 per cent. But for the coming year we are leaving our forecast unchanged and also expect GDP growth of 6.5 per cent. This would mean that the Chinese government would at least continue to fulfil the targets it has set itself, albeit only just. It is open to question whether Beijing will be able to dispense with new large-scale economic stimulus measures, but this cannot be ruled out. Finally, President Xi long ago declared war on the country’s rampant debt and has also been able to score some initial minor successes. However, if the economy comes under heavier pressure fiscal measures would not be taboo. After all, we believe that Beijing is extremely unlikely at the moment to allow growth rates – at least the official ones – to fall below the 6.5 per cent limit.